SEC declares specific stablecoins are not considered securities

The U.S. Securities and Exchange Commission (SEC) recently released a statement regarding stablecoins, clarifying that certain stablecoins designated as ‘covered’ will not be considered securities. This primarily applies to fiat-backed stablecoins that do not provide any yield or interest to stablecoin holders. On the other hand, stablecoins that are not classified as covered do not meet the SEC’s criteria for securities, but the SEC also refrains from expressing a view on them, which includes non-USD stablecoins, commodity linked stablecoins, and algorithmic stablecoins.

The SEC’s statement implies that Tether may not fit the classification of a ‘covered’ stablecoin. This conclusion is based on the SEC’s requirement that reserves for USD stablecoins must be held in low-risk and easily liquid assets, without including precious metals or other crypto assets. As Tether’s reserves consist of approximately 9% metals and crypto, they would not meet the SEC’s criteria for reserves that are both low-risk and easily liquid. Additionally, around 8% of Tether’s reserves would likely not qualify as low-risk and readily liquid, further complicating their status.

While there is stablecoin legislation on the horizon, the exact timing remains uncertain, prompting the SEC to issue this statement in the interim to provide more clarity. This move helps alleviate some legal uncertainties for companies like Circle, particularly in light of recent market volatility linked to tariffs. By addressing the status of stablecoins, the SEC may sidestep questions surrounding the new USD1 stablecoin from World Liberty Financial, which is reportedly tied to the Trump family.

The legal basis for determining if covered stablecoins are not deemed securities draws from a 1990 legal case, Reves v. Ernst & Young, which established the Reves Test. This test helps evaluate if an issuance resembles a security based on multiple factors, including whether the motivation for issuance is to raise money or serve a commercial purpose. Regarding stablecoins, the secondary market’s purpose is not for speculation or investment but to stabilize the stablecoin’s value, reinforcing the argument against classifying them as securities.

One dissenting voice within the SEC, Commissioner Caroline Crenshaw, raised concerns about stablecoins’ opaque nature, lack of collateralization, and being uninsured, loaded with risks throughout their distribution chain. She emphasized that stakeholders beyond issuers play a critical role, as intermediaries can impact the stablecoin’s stability. Despite the SEC’s stance on the risk-reducing factor, Crenshaw highlighted that stablecoins pose significant risks to holders due to their multi-layer distribution chain, emphasizing the need for transparency and regulation.

This latest SEC statement on stablecoins aligns with the organization’s broader goal of providing clearer regulations within the digital assets sector. Acting Chair Mark Uyeda outlined several other areas the SEC intends to revisit, including guidance notes on cryptocurrencies as investment contracts, qualified custodians, and funds investing in Bitcoin futures markets. The SEC’s recent actions, such as rescinding SAB 121 and establishing a crypto task force, reflect a larger effort to offer more streamlined guidelines and reduce legal uncertainties in the digital asset space.